Best Practices for Working with Investors
Investors are key to mobilizing your business idea. Learn how investment deals work and tips to keep your investors happy.
In the business world, connections are valuable. They are your ticket to success. When you get well with others, you have a better chance of making it big.
Investors, in particular, are the people you have to make time for. You don’t build strong relationships overnight; you have to put in the work and effort for it. You need to learn what makes the person tick and what throws them off. You must familiarize yourself with how investment deals are set, maintained, and fulfilled.
Types of Investors
First up, you need to understand the kind of business people you’re working with. This will give you a good idea of how involved they will be in your project. It will also determine what their goals are.
So, here are the kinds of investors you might encounter:
Angel investors are individuals with a high net worth who provide financial support to early-stage businesses. They usually have a minimum net worth of $1 million and earn at least $200,000 annually. An angel investment typically involves the sharing of ownership equity in exchange for funding. This is a high-risk type of investment wherein the investor gambles on your company.
When it comes to working with angel investors, the arrangement can either be a one-time investment or a continuous injection of funds. You can expect that since it’s a high-risk investment for them, these people are willing to give out counsel and other networks to help you succeed. They are often the most generous providers, willing to freely share their expertise and resources, hence their heaven-sent title.
Venture capitalists (VC) can be high net worth individuals, investment banks, insurance companies, or any other private entity. They typically provide financial aid to startups, but there are cases that the contribution comes in the form of technical or managerial expertise. These bodies often invest in early-stage startups with good potential for high returns. VCs base the scale of their investment on a company’s assets, size, and stage of product development.
Again, VCs are a high-risk investment so you can expect that they’ll be eager to help out. A VC investment is extremely risky in that the funding is illiquid and the shares can’t be sold or redeemed into cash. Hence, VC investors will be investing long-term in your company and will heavily rely on the profitability of your business.
Private equity is a type of alternative startup investment that consists of capital not listed on a public exchange. Investors of private equity directly engage with private companies. But in some cases, the buyout of public companies results in the delisting of public equity. In short, private equity provides capital investment for companies that are not publicly traded.
Private equity is similar to VC. A private equity fund invests in companies for a long time to sell its share for a substantial profit. Unlike VC, though, it offers a higher amount of funding up to billions of dollars.
And as for the people you’ll be working with, a private equity fund is made up of Limited Partners or General Partners. The partnership determines the amount of liability and responsibility shared among the individuals involved. You can expect dealings with a good number of investors.
Investment banks help startups and other entities raise funds for expansion and improvement of operations. They act as intermediaries in large and complex financial dealings. They are usually involved when a company launches its initial public offering (IPO), or when there’s a merger happening. It also takes on the role of a broker or financial adviser for pension fund clients.
We can sum it up by saying that investment banks are your best option when it comes to raising capital. They offer professional advice in terms of negotiating deals and managing your finances. You can expect a whole lot of boardroom meetings with these types of investors.
Friends & Family
Mixing business with relationships is tricky, so you better tread carefully. A friend or family member may be interested in investing in your business and are willing to offer a generous deal. Before you get too excited, you better strike a clear and fair bargain to avoid mishaps. This type of transaction can easily turn sour and has a lot more at stake than any other type of investment. So, take time to review things before you jump ahead with the deal.
Whether your friend is offering help in the form of a loan or expertise, you must clarify all the expectations and boundaries involved. For example, what will be traded in exchange for the loan? What will be your exit strategy? Is there a plan B?
Keep in mind that you need to put in the same amount of effort and professionalism despite it being a personal deal. So, be wise when it comes to this type of investment.
Tips on Working with Investors
Now that we know the kind of investors we’re working with, here are some tips to maintain a good relationship with them:
1. Stay in communication
Your investors are allotting valuable time and resources for your business. They are taking the same risk of failure in investing, as you are in pursuing your projects. They lose if you lose. Hence, you must consistently communicate your company’s progress and updates. Sharing milestones and significant marks will give them assurance and encouragement to further invest. Likewise, sharing roadblocks and impediments will give them a realistic idea of your work. They can, in turn, assist you in those problems.
2. Send them their K1s on time!
Be professional in your dealings by sending in important documents like K-1 on time. This is important when it comes to building trust and transparency. The K-1 report gives an update to your shareholders, so they’ll be expecting it on schedule. Don’t be lazy when it comes to processing these tasks. And this goes for all other forms involved in the partnership.
3. Don’t talk poorly about them
Just as a small flame can set a whole forest on fire, a bad word of mouth can burn bridges. And in the competitive world of business, you should never burn bridges. Always be professional in dealing with people and never talk badly about anyone. Word travels fast in social circles and you should never be in the business of badmouthing a business partner.
4. Be grateful
Your investors put their faith in you as an entrepreneur. In a saturated industry where they could invest their funding in any other startups, they chose yours. Never take for granted their leap of faith. Show off your gratitude by consistently giving them credit. Take any opportunity to return the favor, whether it’s in referring them or promoting their businesses. Incorporate a sense of loyalty in your dealings.
5. Remember they’re people just like you and me
At the end of the day, investors are just people. Take time building a genuine relationship with them. This cultivates a healthy and professional working environment. So, take the extra effort to socialize and get to know them a bit more. You might find you have more than just business interests in common.
Building up your Business
Finding investors and keeping them invested is a challenging task. It’s not easy to maintain professional relations while also trying to achieve breakthroughs in your company. This is why it’s always a good idea to ask for help in your processes. Full Scale, for one, can take off some of the heavy work you need to do in managing your startup.
Full Scale is an offshore software development company that offers various recruitment and product development services to startups. We can take care of all the time-consuming work involved in your operations so you can focus on developing your core competencies.
Want to learn more? Talk to us!